Wall St. and Business Wednesdays: The Basic Structure Of The Federal Open Market Committee (FOMC)


The FOMC is composed of the seven members of the Board of Governors and five Reserve Bank presidents. The president of the Federal Reserve Bank of New York serves on a continuous basis; the presidents of the other Reserve Banks serve one-year terms on a rotating basis beginning January 1 of each year. Rotation is such that each year one member is elected to the Committee by the boards of directors of Reserve Banks in each of the following groups: (1) Boston, Philadelphia, and Richmond; (2) Cleveland and Chicago; (3) Atlanta, St. Louis, and Dallas; and (4) Minneapolis, Kansas City, and San Francisco.

By statute, the FOMC determines its own organization. Each year at its first meeting, the Committee elects its Chairman and Vice Chairman and selects staff officers to serve the Committee for the coming year. Traditionally, the Chairman of the Board of Governors is elected Chairman and the president of the Federal Reserve Bank of New York is elected Vice Chairman. Staff officers are selected from among the officers and employees of the Board of Governors and the Federal Reserve Banks.

By law, the FOMC must meet at least four times each year in Washington, D.C. Since 1981, eight regularly scheduled meetings have been held each year at intervals of five to eight weeks. If circumstances require consultation or consideration of an action between these regular meetings, members may be called on to participate in a special meeting or a telephone conference, or to vote on a proposed action by telegram or telephone. At each regularly scheduled meeting, the Committee votes on the policy to be carried out during the interval between meetings.

Attendance at meetings is restricted because of the confidential nature of the information discussed and is limited to Committee members, nonmember Reserve Bank presidents, staff officers, the Manager of the System Open Market Account, and a small number of Board and Reserve Bank staff.

The Decisionmaking Process
Before each regularly scheduled meeting of the FOMC, System staff prepare written reports on past and prospective economic and financial developments that are sent to Committee members and to nonmember Reserve Bank presidents. Reports prepared by the Manager of the System Open Market Account on operations in the domestic open market and in foreign currencies since the last regular meeting are also distributed. At the meeting itself, staff officers present oral reports on the current and prospective business situation, on conditions in financial markets, and on international financial developments. In its discussions, the Committee considers factors such as trends in prices and wages, employment and production, consumer income and spending, residential and commercial construction, business investment and inventories, foreign exchange markets, interest rates, money and credit aggregates, and fiscal policy. The Manager of the System Open Market Account also reports on account transactions since the previous meeting.

After these reports, the Committee members and other Reserve Bank presidents turn to policy. Typically, each participant expresses his or her own views on the state of the economy and prospects for the future and on the appropriate direction for monetary policy. Then each makes a more explicit recommendation on policy for the coming intermeeting period (and for the longer run, if under consideration). Finally, the Committee must reach a consensus regarding the appropriate course for policy, which is incorporated in a directive to the Federal Reserve Bank of New York—the Bank that executes transactions for the System Open Market Account. The directive is cast in terms designed to provide guidance to the Manager in the conduct of day-to-day open market operations. The directive sets forth the Committee's objectives for long-run growth of certain key monetary and credit aggregates. It also sets forth operating guidelines for the degree of ease or restraint to be sought in reserve conditions and expectations with regard to short-term rates of growth in the monetary aggregates. Policy is implemented with emphasis on supplying reserves in a manner consistent with these objectives and with the nation's broader economic objectives.

Effects of Policy
Depository institutions are required to maintain reserves in certain proportions against various types of their checkable deposits. Open market operations directly affect the level of reserves in the banking system. Federal Reserve purchases of securities add to reserves; sales withdraw reserves from the System. If reserves increase, depository institutions will generally acquire new loans and investments, which will tend to exert downward pressure on interest rates.

Open market operations as directed by the FOMC are the major tool used to influence the total amount of money and credit available in the economy. The Federal Reserve attempts to provide enough reserves to encourage expansion of money and credit in keeping with the goals of price stability and sustainable growth in economic activity.

By law, the Board of Governors must keep a record of the actions taken by the FOMC on all questions of policy and to include in its annual report to Congress the vote on and reasons for each action. To provide this information on a timely basis, minutes are prepared after each meeting and are released to the public a few days after the next regularly scheduled FOMC meeting.

Twice a year the Board submits a written report to Congress on the state of the economy and the course of monetary policy, and the Chairman is called on to testify on this report.

This description of the FOMC appears on the website of the Board of Governors of the Federal Reserve System.

Wednesday, February 2, 2005